2016 FEI-CFRI:
Summary
Written by: eric agosti
1
Financial Executives International (FEI) held its 35th annual Current
Financial Reporting Issues (CFRI) conference in New York City on
November 14 and 15.
The CFRI conference focuses on the issues currently faced by
financial statement preparers. Representatives from the Financial
Accounting Standards Board (FASB) and SEC discussed emerging
accounting trends, concerns, and guidance. Panelists included SEC
registrants, regulators, public accounting firms, and attorneys.
The following highlights were prepared by one of Siegfried’s
Professionals, and focus on the conference’s most compelling
sessions.
• Implementation of the Revenue Recognition Accounting Standard
• The New Leases Accounting Standard
• Non-GAAP Measures and Metrics: Getting it Right
2
Implementation of the Revenue
Recognition Accounting Standard
The following FEI panel discussed ASU 2014-09, Revenue from Contracts with Customers (Topic 606):
• Christine DiFabio, Assistant Controller, Zoetis Inc.
• Michael Cleary, Vice President, Accounting and Financial Reporting, The Boeing Company
• Kevin McBride, Global Accounting and Financial Services Controller, Intel
• Steve Rivera, Worldwide Senior Director, Financial Compliance and Procedures Group, Johnson and
Johnson
This new standard will impact all companies within certain industries more affected than others. Companies
that buy or sell bundled products and services (multi-element) or engage in major projects could see
significant changes in the timing of revenue recognition. Upon adoption of the new standard, companies
will be required to follow a five-step process to recognize revenue. The five steps are:
1.
2.
3.
4.
5.
Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognize revenue when (or as) the entity satisfies a performance obligation
During the assessment phase, companies may establish their planned method of adoption: a full
retrospective method or a modified retrospective method. The full retrospective method requires that
the cumulative effect of adoption on periods prior to those presented shall be reflected in the carrying
amounts of assets and liabilities as of the beginning of the first period presented. Meanwhile, the modified
retrospective method requires companies to apply the new
revenue standard only to the financial statements in the year of
do not have a planned
adoption.
method of adoption
52%
A PwC survey indicates that a full 52% of respondents do not
have a planned method of adoption, 18% have selected full
retrospective, and 30% have selected the modified retrospective
method.
18%
have selected full
retrospective
30%
have selected modified
Implementation Status
retrospective
The panel referenced PwC’s recently published survey, 2016
Revenue Recognition Survey: Readiness Update, Impacts, and
Remaining Challenges1, which provides information on the
implementation progress, challenges, and impacts of implementation and resources needed. This survey
found that 75% of public company respondents are continuing their initial impact assessment and that only
8% of public company respondents have not begun an assessment.
More than 75% of all respondents cited contract reviews, new accounting policies, and documentation of
the conversion process as the most difficult aspects of implementing the new revenue recognition standard.
This shows that substantial progress has been made since the standard was introduced.
1
http://www.pwc.com/us/en/audit-assurance-services/accounting-advisory/assets/2016-PwC-FERF-rev-rec-survey.pdf
3
For public business entities, as well as certain nonprofit entities and employee benefit plans, the effective
date is annual reporting periods, and interim periods therein, beginning after December 15, 2017. The
effective date for all other entities is one year later (December 15, 2018). Early adoption is permitted only as
of annual reporting periods, and interim periods therein, beginning after December 15, 2016.
FASB/IASB Joint Transition Resource Group for Revenue Recognition
On June 3, 2014, the FASB and the IASB announced the formation of the Joint Transition Resource Group
for Revenue Recognition (TRG). The TRG will inform the IASB and the FASB about potential implementation
issues that could occur when companies or organizations implement the new standard. The TRG will also
provide stakeholders with an opportunity to learn about the new standard from others involved with
implementation. While the TRG does not specifically issue guidance, they inform the FASB and IASB about
implementation issues. Recently published standards related to issues identified by the TRG include:
• ASU 2016-12: Narrow-Scope Improvements and Practical Expedients
• ASU 2016-10: Identifying Performance Obligations and Licensing
• ASU 2016-08: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
Staff Accounting Bulletin Topic 11.M (SAB 74) Disclosure Requirements
On September 22, 2016, the SEC staff issued comments on the disclosure requirements of SAB 74 related to
the expected impact on financial statements of the future adoption ASU 2014-09. SAB 74 requires disclosure
of the potential material effects of newly issued standards when they are adopted. In addition to the general
statement about the lack of sufficient information or the inability to reasonably estimate the expected
impact on the financial statements, the Staff asked registrants to consider additional qualitative disclosures
to:
• A brief description of the new standard, the date that adoption is required, and the date that the
registrant plans to adopt, if earlier.
• A discussion of the methods of adoption allowed by the standard and the method expected to be
utilized by the registrant, if determined.
• A discussion of the impact that adoption of the standard is expected to have on the financial
statements of the registrant, unless not known or reasonably estimable. In that case, a statement to
that effect may be made.
• Disclosure of the potential impact of other significant matters that the registrant believes might
result from the adoption of the standard (such as technical violations of debt covenant agreements,
planned or intended changes in business practices, etc.) is encouraged.
4
The New Leases Accounting Standard
The following FEI panel discussed implementation of the new leasing standard ASC 842 — Leases:
• Robert Grecco, Senior Vice President and Controller, Ralph Lauren Corporation
• Gregg Nelson, Vice President and Chief Accountant, IBM
• Chad Soares, Partner, PwC
• Brent Woodford, Senior Vice President Planning and Controller, The Walt Disney Company
The panel discussed a number of implementation issues, including the effort to undertake a complete
and accurate inventory of leases, use of leasing systems, and key decisions, such as the use of practical
expedients. The FASB has not set up a transition resource group as they did for revenue recognition, but the
panel discussed the responsiveness of the FASB as well as the Emerging Issues Task Force to questions from
constituents.
Lease Identification
ASC 842 provides two criteria to determine whether a contract contains a lease: A lease must explicitly or
implicitly identify a specific asset that is the subject of the contract, and the lessee must have the right to
control the asset. If the lessor has a substantive substitution right, the contract does not meet the definition
of a lease. The substantive right to substitute an asset requires the practical ability to substitute the
identified asset and the lessor benefits from that right.
Under ASC 842, a contract conveys the right to control the use of an identified asset if, throughout the
period of use, the customer has the right to direct the use of the identified asset and obtain substantially all
of the economic benefits from the use of the identified asset.
Lease Inventory and Tracking
The panel discussed a number of implementation issues, but the most significant issue is identifying and
tracking all of their company’s leases. Often, authorization to enter into lease agreements is allocated
throughout the company and lease agreements may not always be communicated for current reporting
requirements. The current lease reporting does not involve the same rigor required to implement the new
standard.
Additionally, service and other agreements that may contain embedded leases have not always been
scrutinized since service agreements and operating leases were off balance sheet. To facilitate the
identification and assessment of all lease agreements, companies are assessing the need for specialized
software and/or third party assistance.
Practical Expedient Elections
An entity may elect the following practical expedients, which must be elected as a package and applied
consistently by an entity to all of its leases (including those for which the entity is a lessee or a lessor), when
applying the pending content that links to this paragraph to leases that commenced before the effective
date:
1. An entity need not reassess whether any expired or existing contracts are, or contain, leases.
5
2. An entity need not reassess the lease classification for any expired or existing leases (that is, all
existing leases that were classified as operating leases in accordance with Topic 840 will be classified
as operating leases, and all existing leases that were classified as capital leases in accordance with
Topic 840 will be classified as finance leases).
3. An entity need not reassess initial direct costs for an existing leases.
As discussed in ASC 842-20-25-2, a lessee may elect not to apply the recognition requirements of ASC 842
to short-term leases. This election should be made by class of underlying asset. If a lessee chooses to elect
this short-term lease exception, it should recognize the lease payments in net income on a straight-line basis
over the lease term. Variable lease payments should be recorded in the period in which the obligation for
the payment is incurred.
ASC 842 provides a practical expedient that permits lessees to make an accounting policy election (by class
of underlying asset) to account for each separate lease component of a contract and its associated non-lease
components as a single lease component. Lessees that do not make an accounting policy election to use
this practical expedient are required to allocate the consideration in the contract to the lease and non-lease
components on a relative standalone price basis.
6
Non-GAAP Measures and Metrics: Getting
it Right
The conference hosted a session focused specifically on the use of non-GAAP measures. It featured the
following panelists:
• Nik Cyprus, Director and Chairman, Audit Committee Digital Globe Inc.
• Mark Kronforst, Chief Accountant, Division of Corporation Finance, SEC
• John White, Partner, Cravath, Swaine & Moore LLP
• Neri Bukspan, Partner, EY
• Mark Lamonte, Managing Director, Moody’s Investors Service
In addition to the dedicated panel, nearly every session of the conference discussed the impact of the SEC’s
focus on non-GAAP measures, including perspectives from Cathy Engelbert, CEO Deloitte LLP and Russell
G. Golden, Chairman, Financial Accounting Standards Board. The increased attention by financial statement
preparers and auditors in 2016 is the result of the SEC’s Division of Corporation Finance (DCF) updating its
Compliance & Disclosure Interpretations on the use of non-GAAP financial measures in May 20172, as well as
increased focus on non-GAAP measures in comment letters issued by the DCF.
Many companies disclose non-GAAP measures as they provide investors information about their business
that reflects management’s assessment of their company’s
performance. Non-GAAP measures vary and may provide
additional information about operational performance, liquidity, or
Percentage of reviews with
the ability to comply with covenants in debt agreements. Members
SEC comment letters
of the panel discussed the evolution of non-GAAP measures to
address the limitations of GAAP and to provide more relevant
information to investors. The FASB has received calls from some
constituents to provide standardized non-GAAP measures to
increase clarity and minimize confusion.
23%
17%
2016
2015
As there is little consistency in what non-GAAP measures individual
companies disclose and how similar measures are calculated,
the SEC has expressed concern that their use may be misleading or confusing. According to Deloitte’s
publication, SEC Comment Letters —Statistics According to “Edgar” — A Supplement to the Ninth Edition3, SEC
comments related to non-GAAP measures were included in 23% of reviews with comment letters in review
year 2016, compared with 17% in the prior year.
In 2016, comments focused on (1) undue prominence of a non-GAAP measure (e.g., by including a full nonGAAP income statement); (2) when a non-GAAP measure is not appropriately reconciled to the most directly
comparable GAAP measure; (3) disclosures about the purpose and use of non-GAAP measures and clear
labeling; (4) liquidity versus performance measures; and (5) the nature of reconciling adjustments and the
related disclosures. Deloitte’s statistics noted above do not reflect the comments solely on Forms 8-K, which
show the additional emphasis that the SEC staff has been placing on non-GAAP measures.
7
The panel discussed best-practice approaches to non-GAAP measures such as maintaining consistency
within a company’s previous SEC filings and within its industries. The panel specifically mentioned a
publication from the Center for Audit Quality: Questions on Non-GAAP Measures – A Tool for Audit Committees4
as a useful resource for financial statement preparers and auditors when drafting or reviewing non-GAAP
disclosures.
https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/us-aers-sec-comment-letters-statistics-according-to-edgar-supplement-to-the-ninthedition.pdf
4
http://www.thecaq.org/docs/default-source/reports-and-publications/questions_on_non-gaap_measures_final.pdf
2
3
8